Pleased Demand Slowing And “Getting On Top Of Inflation”

RBNZ Governor Orr said that today’s decision to hike rates 25bp was very difficult and that the final decision was about having the confidence that enough had been done to contain inflation. He stated that the bank is pleased that it is “getting on top of inflation” and that demand is slowing towards supply, which is what needed to happen.

• RBNZ Governor Orr stated that a “vote” is a tool available to the central bank to make decisions. The May meeting was the first time this option has been used and the vote was 5-2 in favour of the 25bp hike (with the votes remaining anonymous). But Orr made it clear that the Committee as a whole stood by the decision.
• The labour market is now “less stressed”, helped by an increase in the supply of labour from immigration. Orr emphasised that businesses are now saying that demand is their biggest constraint rather than labour. He also believes that the migration surge is behind them.
• The bank estimated that rebuilding following recent extreme weather will add about 1.5% to GDP over a number of years but net government consumption is projected to decline over time, which means that fiscal policy will be disinflationary.
• The impact of today’s move on mortgage rates should be limited as it partially met what was priced in. It should underpin those rates though, which is the message the RBNZ wanted. The Committee stated that its OCR forecasts were unchanged since November and that it was the market that changed its expectations on migration and budgetary developments.
• RBNZ research is showing that the impact of labour and profits on inflationary pressures has been “even”.
• Monetary policy doesn’t depend on the “supply side coming to the rescue” but improved productivity growth would make the RBNZ’s job easier.